Three Reasons to Buy Gold Equities Today

A strong stomach and a tremendous amount of patience are required for gold
stock investors these days, as miners have been exhibiting their typical volatility
pattern.

That's why I often say to anticipate before you participate, because gold
stocks are historically twice as volatile as U.S. stocks. As of March 31, 2013,
using 10-year data, the NYSE Arca Gold BUGS Index (HUI) had a rolling one-year
standard deviation of nearly 35 percent. The S&P 500's was just under 15
percent.

I believe the drivers for the yellow metal remain
intact, so for investors who can tolerate the ups and downs, gold stocks
are a compelling buy. Here are three reasons:

1. Gold Companies are Cheap.

According to research from RBC Capital Markets, Tier I and Tier II producers
are inexpensive on historical measures. Based on a price-to-earnings basis,
RBC finds that "shares are currently trading not far from the recent trough
valuations observed during the 2008 global financial crisis."

And on a price-to-cash-flow basis, gold stocks are trading at bargain basement
prices. The chart below shows that average annual cash flow multiples for North
American Tier I gold companies have fallen to lows we haven't seen in years.
Since January 2000, forward price-to-cash-flow multiples have climbed as high
as 26 times. This year, we see multiples at the high end that are less than
half of that.

On the low end, today's price-to-cash-flow of 6.5 times hasn't been seen since
2001.

Tier I and Tier II companies "offer investors an attractive entry point from
an absolute valuation perspective with respect to the broader market," says
RBC.

2. Gold companies are increasing their dividends.

With the Federal Reserve suppressing interest rates, investors have had to
adapt and reallocate investments to generate more income.

That's where gold companies come in. I
have discussed how miners have become much more sensitive toward the
needs of their investors as they compete directly with bullion-backed ETFs
and bar and coin buying programs.

In response to shareholders' desire to get paid while they wait for capital
appreciation, gold companies have rolled out dividend programs and increased
payouts. "The growth in dividend payout has been spectacular when looking at
the industry as a whole," says my friend Barry Cooper from CIBC World Markets.

His data shows that over the past 15 years, the world's top 20 gold companies
have increased their dividends at a compound annual growth rate of 16 percent.
By comparison, gold only rose 12 percent annually.

Not only are gold companies increasing their payouts, the yields offer a tremendous
income value to investors compared to government bonds today. Whereas investors
receive a 1.5 percent yield on a 10-year Treasury, the stocks in the Philadelphia
Stock Exchange Gold and Silver Index (XAU) are paying a full percentage point
more!

This is a significant change from the past: In April 2008, the Treasury yield
was nearly 3 percent more than the dividend yield of the XAU.

In addition, the yields of gold stocks have been climbing over the past year
while the 10-year Treasury remains low.

3. Enhanced returns in a diversified portfolio.

We have long advocated a conservative weighting of 5 to 10 percent in gold
and gold stocks because of the inherent volatility you are seeing today. But
despite the extreme moves, there's a way to use gold stocks to enhance your
portfolio's returns without adding risk.

Take a look at the efficient frontier chart below, which creates an optimal
portfolio allocation between gold stocks and the S&P 500, ranging from
a 100 percent allocation to U.S. stocks and no allocation to gold stocks, and
gradually increasing the share of gold stocks while decreasing the allocation
to U.S. equities.

The blue dot shows that from September 1971 through March 2013, the S&P
500 averaged a decent annual return of 10.34 percent.

What happens when you add in gold stocks? Assuming an investor rebalanced
annually, our research found that a portfolio holding an 85 percent of the
S&P 500 and 15 percent in gold stocks increased the return with no additional
risk. This portfolio averaged 10.96 percent over that same period, or an
additional 0.62 percent per year, over holding the S&P 500 alone. Yet the
average annual volatility was the same.

Although 0.62 percent doesn't seem like much, it adds up over time. Assuming
the same average annual returns since 1971 and annual rebalancing every year,
a hypothetical $100 investment in an S&P 500 portfolio with a 15 percent
allocation in gold stocks would be worth about $7,899. This is greater
than the $6,246 for the portfolio solely invested in the S&P 500 while
adding virtually zero risk.

Case Study: Alamos Gold (AGI)

Not all miners are worthy of your investment, and the task of picking quality
gold company candidates isn't simple. One company we currently like is Alamos
Gold, which reported first-quarter 2013 results last week.

To the delight of many mining analysts, the company beat analysts' expectations
on both the top and bottom line. Alamos grew its production to 55,000 ounces
of gold from 40,500 ounces in the same quarter last year.

In addition, AGI boasts an 8.76 percent free cash flow yield, allowing executives
to build the business through paying off debt, making acquisitions or returning
money to shareholders. In Alamos' case, the company announced a stock repurchase
of 10 percent of its float over the next 12 months.

While the company trades at a premium to most junior producers, it may be
well worth the extra coin, as its low cost profile, cash generation and self-funding
capabilities, as well as its discipline in returning capital to shareholders
fit our growth at a reasonable price (GARP) model.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors,
Inc., which manages a diversified family of mutual funds and hedge funds specializing
in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and
certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing
global natural resources fund in 2010. In 2009, the World Precious Minerals
Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four
years for that achievement. In addition, both funds received 2007 and 2008
Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a
leading publication for the global resources industry, and he is co-author
of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve
global conflict, and the William J. Clinton Foundation on sustainable development
in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator
on financial television. He has been profiled by Fortune, Barron's, The Financial
Times and other publications.

Please consider carefully a fund's investment objectives, risks, charges and
expenses. For this and other important information, obtain a fund prospectus
by visiting www.usfunds.com or by calling
1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed
by U.S. Global Brokerage, Inc.